SA's retirement fund industry face tougher regulation

South Africa’s retirement fund industry has undergone significant change but there is still a long road ahead, with much stronger reform, regulation and supervision expected in the near future, according to PwC’s 2014 Retirement Fund Strategic Matters and Remuneration Survey released today.

Although the majority of trustees (69%) believe that the South African retirement fund is appropriately regulated from the perspective of protecting members, 28% beg to differ.

Gert Kapp, Retirement Fund Leader for PwC Southern Africa, says: “Much change has taken place in the South African retirement fund industry, but there is still plenty more to come. The National Treasury has undertaken to release a set of draft regulations on default strategies by May 2014.

In addition, the Registrar of Pension Funds is preparing a number of draft regulatory instruments intended to implement new provisions in the Pension Funds Act relating to the training of trustees, ‘fit-and-proper’ requirements for trustees and improving fund governance.

The PwC 2014 Retirement Fund Strategic Matters and Remuneration Survey collates the responses of 183 participants representing a total asset base of R592 billion across a wide range of funds from large to small. It offers a benchmark against which trustees can compare various aspects of their fund’s working and strategies with those of their peers.

The aim of the survey is to identify trends in roles and remuneration of trustees and principal officers, and shed light on the stance retirement funds take on trustee education.

The survey covers four broad focus areas: trustees’ activities and remuneration; trustees’ education; principal officers and their remuneration; and regulatory matters and retirement reform. New areas investigated include questions about chairpersons and subcommittees as well as regulatory matters and retirement reform.

Kapp says: “It is not surprising that survey participants feel that regulatory cost and complexity is becoming excessive.

“Furthermore, participants think that the pace of change is too slow and that the proposed reform should be implemented without undue delay.”

The three top areas of regulatory changes expected to have the most additional cost for members of funds were compliance with Regulation 28; retirement reform and legislative changes regarding taxation and preservation; and recent revised financial statements format.

The majority of participants (72%) felt that there was scope for simplification or a reduction in costs in the operation of their funds.

Trustees’ activities and remuneration

In the 2010 and 2012 PwC retirement surveys, the proportion of funds that remunerated some or all trustees remained static at 45%, but in 2014 this increased to 50% overall.

For specialist funds, the median remuneration band for chairpersons, trustees and professional trustees is the same, namely R10 001 – R50 000. In contrast, the median lies in the R50 001 – R100 000 band for standalone funds for all types of trustees. Kapp says: “ It is interesting to note that the fees paid to trustees are relatively low compared to medium –cap financial services organisations and even those paid to trustees of medical schemes. The high level of regulation and supervision as well as the risks associated with the assets under management within the retirement fund sector surely warrants a higher level of pay.”

The main board appears to determine the level of trustee remuneration for standalone funds, according to 58% of the respondents, with the level of remuneration reviewed on an annual basis. Trustees’ remuneration is largely determined by the fund (72%). While most funds do cater for trustee remuneration (55%), a fairly high proportion still does not (43%).

“It is not surprising to note that most funds (63%) have a chairperson of the main board who also sits on a subcommittee or two. This is advantageous for the fund in that the chairperson is perfectly placed to convey outcomes from the subcommittee to the rest of the board.”

Kapp adds: “Survey participants feel the sooner it becomes law that funds have to employ professional and independent trustees the better. In addition, trustee remuneration should be based on skill level, contribution and be benchmarked to industry norms taking into account the complexity of the fund and volume of business.”

Education of trustees

Johannes Grové, PwC Partner in the Retirement Division, says: “The sheer scale of pension fund investments, coupled with the relevant economic, political and administrative risks, places an enormous responsibility on boards of trustees to govern these arrangements wisely.

“Not only do trustees have almost unlimited fiduciary responsibilities placed upon them by law, but they also have a moral obligation to act in the best interest of fund members.”

The number of funds having a formal policy on trustee education has improved from 43% in 2012 to 63% in 2014. “This improvement is largely due to an increase from 60% to 73% among standalone funds,” explains Grové.

Across all funds, trustees spend an average of 17 hours annually on training and attending industry events, compared to 27 hours in the 2012 survey. This decline may be due to factors such as less major industry changes (such as Regulation 28) and increases in the costs of industry events that make them less affordable.

“As expected, professional trustees are the most experienced and highly educated, with 94% having more than five years’ and 53% having more than 10 years’ experience,” says Grové.

Principal Officers and their remuneration

A significant percentage of principal officers (72%) have 10 or more years’ experience and it appears they are staying on until they retire. The majority of principal officers (84%) have a degree or postgraduate degree.

The median remuneration band across all funds was R350 000 – R600 000, but for large funds this was R600 000 – R1 000 0000. For large funds, 29% were remunerated more than R1 000 000.

The role of the principal officer is underestimated and underpaid, according to survey participants. Participants say the role is equivalent to running a company with R2bn assets with no staff but all the responsibilities.

Tom Winterboer, PwC Financial Services Leader for Africa concludes: “The retirement fund industry is undergoing profound changes. Trustees will need to assess and review their governance strategies and manage them in accordance with the new regulations and legislation.”

“Although many of the changes are positive, they tend to come at a cost in terms of additional complexity and record keeping and reporting for fund members,” adds Winterboer.